DUBLIN OFFICE MARKET:Fears grow that the threat of redundancies in banking and insurance sectors will reduce demand for office space
THERE ARE FEARS that Dublin’s office vacancy rate, currently at just under 23 per cent, could rise later this year because of an increased number of firms availing of break options in their leases, but more particularly due to the threat of substantial job losses in the banking and insurance industries. AIB, Bank of Ireland and Ulster Bank are all reducing staff numbers, while Aviva insurance is due to vacate a substantial building in the city when it downsizes later this year.
Agent CB Richard Ellis says in its annual office review that although there was no discernible decline in occupier appetite for Dublin office accommodation in the fourth quarter of 2011, it remains to be seen if the volume of demand and outstanding requirements will be maintained this year and if take-up holds up.
With many corporates likely to curtail their expansion and relocation requirements until such time as the economic climate is more certain, the agency anticipates that total take-up in the Dublin office market may decline from 162,509sq m (1,749,230sq ft) in 2011 to about 130,000sq m (1,399,300sq ft) this year.
The majority of office transactions signed in the city last year comprised 10-year lettings with break options in year five. Most also included some element of a rent-free period. A trend had emerged over the course of the last year for an increasing number of companies to exercise break options in lease contracts.
Savills, on the other hand, is confident that the level of interest in the market evident last year will continue in 2012. The agency says international telecoms, media and technology companies are expected to continue to look to both enter and expand their existing operations in Dublin.
This, in turn, is being led by the ongoing increase in competitiveness, the corporation tax rate and a highly-skilled workforce. A relatively high, albeit falling, overall vacancy level, is expected to keep market terms and conditions tight, with landlords to remain under continued competitive pressure, certainly in the first half of 2012.
Savills says the risks are marginally on the downside for take-up to reach the same level as in 2011, but a level of 130,000sq m is expected. “Achieving this will be largely dependent on the level of pressure businesses are under in 2012 to postpone office relocation decisions due to cost and demand pressures that may emerge throughout the year.”
Agent Jones Lang LaSalle says that although 2011 was a tough year economically for some sectors of the property market, the office sector performed steadily and it anticipated that it will have another successful year in 2012. It is likely that take-up will be at similar if not higher levels than last year, with about 29,263sq m (314,984sq ft) already reserved for the first three months of 2012.
Despite the fact that no development is planned in the short to medium term, it is conceivable that the vacancy rate could increase in 2012, with a number of larger properties coming back on to the market as a result of break options. “We anticipate that there will still be shortages for prime stock in certain size categories and, as a result, refurbishment of older stock will be necessary if it is to compete with modern buildings.”
CBRE says despite the fact that the development pipeline is now firmly halted and take-up is continuing at a healthy pace, the headline vacancy rate for Dublin actually increased slightly to almost 23 per cent, with 830,000sq m (8,934,045sq ft) of space being officially marketed to let in Dublin at the end of the year. The agency estimated that more than 70 per cent of this space is classed as grade A accommodation. However, almost 50 per cent of this is located outside the city in otherwise occupied buildings as opposed to large concentrations of accommodation in individual properties.
CBRE says the Government announcement that it will not be proceeding with the controversial retrospective rent review reform, along with a reduction in stamp duty from 6 to 2 per cent and a capital gains tax waiver on property purchased before the end of 2013, should stimulate transactional activity and stabilise capital values in the investment sector.
Jones Lang estimates that prime headline rents in the city centre now stand at €301 to €344 per sq m (€28/€32 per sq ft), with the highest rents in Dublin 2 and 4. Suburban rents have also stabilised quarter on quarter, ranging from €140 to €182 per sq m (€13 to €17 per sq ft). The agency says that in this occupier-driven market, tenants are capable of negotiating lower rents and flexible lease terms with landlords. “We believe, however, that prime rents have reached the bottom and we are unlikely to see further reductions, other than in some isolated cases.”
Jones Lang says the location of a property is still one of the most important factors for tenants looking to lease space and this is unlikely to change next year. However, if the city centre rents start to increase, certain tenants may be forced to look for alternative, more affordable locations.
The agency also found that age is a significant factor when letting a building. The average date of construction of a property leased in 2011 was 1999. Across all buildings, only nine (5.1 per cent) of those leased were constructed pre-1980 and did not have raised access floors.
Jones Lang also calculated it took an average of 31 months to let properties in 2011. This was lower for newer stock, with older buildings distorting the figure. Buildings completed before 1980 took an average of 37 months to lease.
